The Globe and Mail, Saturday, March 10, 2001

Insured for peace of mind
Buying insurance won't save your life or restore your health but it will preserve your assets, GAIL VAZ-OXLADE writes

By Gail Vaz-Oxlade

Insurance is one of those financial products that as consumers we love to hate. It's expensive. It's complex and rife with misconceptions.
We don't know whom to trust when buying it. And, besides, it's a downer talking about death, disability and illness. But ask anyone who has ever had need of their insurance how they feel about it, and watch the story change.

When Dr. John Paterson of Calgary was forced to quit his pediatric dental practice at the ripe old age of 34 because of eye problems, the emotional numbness he initially felt changed to fear.

"I realized I was facing foreclosure on a newly purchased home and that the building landlord of my dental office was demanding his rent payments, which I was obligated to pay for another two years," Dr. Paterson said.

A visit to his insurance agent reassured him that his disability policy did, indeed, guarantee him a solid income for the rest of his life. "The parachute, indeed, did open," he says, "and I made a soft landing."

Perhaps the biggest misconception that surrounds insurance is the idea of what's being insured. When you buy life insurance, you're insuring your life, right? And when you buy disability insurance, you're insuring yourself against disability.

Wrong on both counts. No matter how much insurance you buy you are going to die eventually. And the greatest insurance policy in the world won't stop you from becoming disabled if that's in your cards.

Regardless of the type of insurance you're buying, what you're really insuring is your money.

According to Scott Beckett, vice-president, living benefits, PPI Financial Group Ltd., which provides services and support to independent insurance agents, "Most insurance products are designed to protect your income or your assets." And the type of insurance you should buy? Well, Mr. Beckett says, that depends on where you are in your life.

Life insurance can be used to protect both your cash flow and your assets. For younger people who simply want to ensure their debts don't become a burden to their parents, a small term policy fits nicely and is cheap.

For those with an elderly parent who is dependent on their income, term insurance will do the trick. And for those who are financially well-established who want to minimize the impact of the taxes due at their death on their estate, a whole or universal life policy will stay in place to meet that long-term need.

"The younger you are the less likely it is that your body is falling apart and the less expensive insurance is," says Ms. Saundra Johnstone, marketing director with London Life Insurance Co. in London, Ont. So the trick to buying insurance at a reasonable price would seem to be to buy it when you don't actually need it, because you have all the other factors in your favour.

That being said, shopping for insurance -- be it life, disability or long-term care insurance -- strictly on price is a fool's game. Buying insurance is more like investing than it is a trip to the supermarket. The kind of insurance you buy shouldn't be based on what's on sale this week, but rather on your need for coverage.

If you're the sole breadwinner in your family, your disability won't just put a wrinkle in your family's financial plan, it'll obliterate it, so you'd better buy the most airtight disability plan you can find. And if you have five kids ranging in age from two through 10, you have a much different need for insurance than the guy who's trying to protect his assets from the clutches of the tax man.

When it comes to life insurance, your need for coverage (the "how much") combined with your resources (your cash flow) and the term (how long you'll need the insurance) are used to determine the type of insurance you'll purchase.

A young family has a big need for income. Without yours, who'll pay the mortgage, support mom or dad staying home to bake cookies for your brood, or make sure your kids get a decent education?

But just when your insurance need may be at its highest, your income will likely be on the lower side. With a big need for coverage and low cash flow, the answer is term insurance. Later, as assets grow, the need for insurance changes from temporary to permanent. With more cash flow because you're established in your career, you can afford higher premiums.

Now you might want to look at a whole life or universal life policy, which not only covers your insurance needs but allows you to shelter more retirement income than you can using a registered retirement savings plan. 

Disability insurance 

Early on Dr. Paterson realized that that hard work alone wouldn't be enough to meet life's unexpected rotten breaks.

"What would I do if I became sick or injured for a long time? Where would the money come from to meet my ongoing obligations?" So he bought himself the very best disability insurance that was available on the market. "This was the most savvy investment I ever made."

"There is a perception of disability insurance as being horrendously expensive," Ms. Johnstone says.

She says people gasp when they compare a disability policy, which costs $80 a month for $3,000 a month in benefits versus a term life insurance for $500,000, which costs just $45 a month in premiums.

"What you really need to do is to put it in perspective. That $3,000 a month, for 12 months, over three years works out to over $100,000.

"Statistically, if you're disabled for more than 90 days you're likely to be disabled for at least three years.

Let that disability interrupt your income for the rest of your life, and your $80-a-month policy would end up paying out $900,000 over the next 25 years." 

Critical illness insurance 

One of the newest entrants into the insurance arena is critical illness insurance. A critical illness (CI) policy works like an emergency fund in the event that you're diagnosed with a condition you're covered for under the policy.

Whether you're facing lengthy and expensive treatments for cancer or you need a pool of money to provide an income while you convalesce from a heart attack, a critical illness payout can provide the money to get you through the crunch until you're back at work.

It can also act as the short-term cash flow until your longer-term disability insurance kicks in for more permanent disabilities. And for those people for whom disability insurance is impossible to get -- people with medical conditions other than those covered by CI insurance, or those who have recently started their own businesses -- CI insurance can be a life-saver when it comes to keeping you financially above water should disaster strike. 

Long-term care insurance 

According to Mr. Beckett, long-term care (LTC) insurance is "the next big thing" in insurance. "It's an insurance product whose time has arrived."

Again, it appears that it is the baby boomers that will drive the growth of this product: "2001 is the year the boomers start turning 55" says Mr. Beckett "and there are lots of people in the same shoes."

According to 1999 and Beyond, Challenges of an Aging Canadian Society, a research paper produced by the National Advisory Council on Aging, of the last nine years of a Canadian senior's life, three years each will be marked by slight, moderate and severe disability.

Lots of bodies competing for beds and care will mean a significant strain on the health care system.

So long-term care insurance is one tool in financing our at-home and residential care. And for boomers squeezed between young families and aging parents, LTC insurance can be a sanity saver since it not only minimizes the financial strain, it ensures that aging parents can be well cared for even if the children are living in another part of the country. 

Time for a review 

Alan Ryall, president of Triplus Financial Security Planning Inc. in Guelph, Ont., says that what often triggers a need for more or different insurance is a change in life circumstances.

"As a family gets older, expenses rise to meet the income being generated. A spouse might say, 'I'm not going to pursue a career' so the need for insurance changes."

Other life events that may signal a changing need for insurance could be anything from forming a new business partnership, which may trigger an insurance discussion between the partners, to a divorce agreement that stipulates insurance to protect child support payments. Over time, insurance needs change. And not all types of insurance will be suitable at any given point in time.

The trick to managing the insurance continuum is to be covered today for what's important today, and to have an eye on what may be important tomorrow. Then the insurance is working for you -- not the other way around. 


Alan Ryall is president of Triplus Financial Security Planning Inc. in Georgetown, Ont. Incorrect information was published Saturday in Net Worth.

(Tuesday, March 13, 2001, Page A2)
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